Wednesday, March 31, 2010

In a yin-yang unity, assets will continue deflating as the speculative credit bubble pops (yin) even as prices for FEW resources (food, energy, water) start to rise as demand exceeds supply (yang).

People seem drawn to the deflation-inflation duality, as if deflation precludes rising prices. Perhaps we should look to the Asian model of yin-yang unity for clarity.

Readers often ask me if I am in the deflationary or inflationary camp, and I have to answer "both and neither."

Recall that I have a degree in Comparative philosophy (combining studies of both Eastern and Western traditions), so the idea that two diametrically opposed forces, characterized as yin and yang in Chinese philosophy, could create the unity of the Universe seems common-sensical to me rather than "impossible."

So how could we experience deflation in assets and increases in prices for the FEW resources (food, energy, water) and services such as "healthcare" (a.k.a. sickcare), government and "higher" education?

Even as assets deflate in value as collateral, income and credit contract, other factors will drive prices higher for non-discretionary goods and services.

Though global demand for materials such as copper and oil will decline as the global economy's bogus "recovery" fades, demand will eventually exceed supply as prices fall. Perhaps this sounds paradoxical, but as prices for raw materials decline, producers close mines and mills and put off investing in new production for two reasons: the absence of cheap credit and the unprofitability of bringing costly new sources online.

Recall that all the easily accessible stuff, be it copper, oil, gold or timber, has already been extracted/pillaged, so costs for new production going forward are intrinsically high.

This is how supply can decline even faster than demand, causing prices to rise even as asset deflation causes equity, capital and credit to contract.

Though massive global overcapacity of commodity goods such as electronics, furniture, clothing, etc. will put downward pressure on those prices as the global "recovery" melts into Global Depression, eventually even these prices may rise as factories close and rising energy costs increase manufacturing and shipping costs.

When oil hit $149/barrel, the cost of shipping goods from China to the U.S. outstripped the cost advantages, and news reports of firms moving production back to North America became common.

How could demand for essentials exceed supply on a global scale? In one word: malinvestment. On a global scale, there has been an unprecedented massive misallocation of capital into non-productive property assets such as empty cities, empty highrises, empty malls and empty McMansions, and stupendous diversion of potentially productive capital into State and private Elites via corporate welfare, bloated State expenses (unsustainable pension contributions and entitlements, inefficient brueaucracies staffed with overpaid technocrat Elites, etc.), transactional churn, Wall Street fraud and embezzlement, lawsuit/legal churn, etc.

Meanwhile, those services which are controlled by the State and the cartels which have captured the levers of governance are free to raise prices regardless of other conditions, as befits monopoly. "Healthcare" will continue rising in cost until the State finally admits its insolvency, the price of "higher" education will continue rising as governments everywhere are forced to push more of the costs onto students, and all governments will increase taxes in a desperate attempt to raise enough revenue to keep funding the pensions and perquisites of public Elites and those parasitic contractors who have but one "customer": the State.

With assets, income and tax revenues all in decline, the "weath effect" is stuck in reverse: borrowing and leverage are both crimped because there is no collateral or income to support them except for central governments, and their stupendous borrowing to fill the void of declining private credit will soon cause interest payments to crimp all other government expenditures.

Then there are the unfortunate, inescapable consequences of demographics: there are not enough workers to support the retirees entering the pipeline of entitlements and dependency, not in Europe, not in the U.S., not in Japan and not even in China.

The under-investment in the petroleum industry is global; stories abound about crumbling oil infrastructure in Iran, Venezuela, Mexico, etc. Theocracies, plutocracies and socialist governments alike have pumped their oil to support their Elites and placate their restive masses with welfare, and diverting that precious swag to investing in future production has been set aside or given lip-service.

Then there are conditions which humans may influence but which we cannot "fix", such as drought, depletion of aquifers, soil degradation, disappearance of glaciers which feed the major rivers of Asia, etc. etc. etc.

So that's how yin and yang form a unity: asset, income and credit contraction/deflation and rising prices due to large-scale supply/demand imbalances which traditional market and State forces cannot repair due to catastrophic mal-investments and the self-serving policies of public and private Power Elites.

For more on these large-scale forces which are at work beneath the propaganda and "nascent global recovery" headlines, please look at these books (if you haven't already read them):

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Primary care physicians already are in short supply in parts of the country, and the landmark health overhaul that will bring them millions more newly insured patients in the next few years promises extra strain.

Yet recently published reports predict a shortfall of roughly 40,000 primary care doctors over the next decade, a field losing out to the better pay, better hours and higher profile of many other specialties. Provisions in the new law aim to start reversing that tide, from bonus payments for certain physicians to expanded community health centers that will pick up some of the slack.

The rest of the article outlines costly new programs to track patients' test results and so on, and to prompt them with an individually tailored list of wellness steps to consider.

Ishabaka added this comment:

Then consider that President Obama is about to sign a bill next week cutting doctor's Medicare fees by 21%. I am a primary care physician.

Who else, I ask you, is getting a 21% federal pay cut? Oh, but we doctors can afford it, because everyone knows we're all millionaires. Lots of luck to the baby boomers becoming eligible for Medicare.

It is certainly tempting to scapegoat one sickcare cartel/trade group or another--doctors, malpractice attorneys, insurers, Big Pharma, HMOs, take your pick--but that, like any simulacrum analysis, is nothing but a distraction.

As I research some of the key components of the reform bill, it seems ever more evident that the "healthcare" system is fundamentally a complex network of self-serving corporate welfare. "Healthcare" is just the marketing screen to mask the vast machinery of the greatest corporate welfare machine ever constructed--yes, it exceeds the Pentagon's feared Military-Industrial complex by a factor of three.

How did we as a nation get such a counter-productive, wasteful, make-us-sick system which costs twice as much (as a percentage of GDP) as developed nations like Australia and Japan?

Certainly corporate welfare and the profiteering enabled by lobbying, fraud and collusion are roots, but I am also thinking that the culture of entitlement which has slowly engulfed the American worldview is ontologically bundled wth a radically unhealthy resentment and dependency: now that we now "deserve" "free" treatment as a "right," we find multiple reasons to resent those providing the services, and our dependency angers us even as it disables us and leaves us fragile and powerless.

Those of you who have experienced co-dependent relationships know how terribly debilitating such arrangements inevitably become: resentment flows freely in both directions, both from those crippled by insecurity, self-loathing, passivity and the need to be "saved" constantly, and those imprisoned by the need to "save" the self-destructive dependent who excels at creating endless obstacles to autonomy, self-awareness and personal responsibility.

We as a nation have become the resentful dependents of a corrosive, unsustainable system of corporate welfare which has been packaged as politically popular entitlements, and the abundance of our resentments knows no bounds. We resent other nations for not sublimating their wants and needs to ours, and we resent those who are still in charge of their own lives because they prove passive resentment isn't the only possible state of being in America.

Readers are often puzzled by the term The Politics of Experience, which is the core of the Survival+ analysis. The term comes from psychiatrist/author R.D. Laing, and I use it to describe the subtle ways that our worldview is molded to make certain forms of political and financial dominance so "natural" that we lose awareness of its arbitrary, carefully engineered structure.

Entitlements now seem as "natural" and ubiquitous as the air itself; the Savior State masks both its partnership with the Power Elites Plutocracy and the historical accidents which enabled the illusion of permanently rising entitlements: the demographics of the Baby Boom, the destruction of our global competitors in World War II, and cheap oil.

Social Security was designed when there were 35 workers to every retiree; the ratio has fallen to 3 to 1 and will soon be 2 to 1--a ratio which is financially impossible.

Medicare began as a modest program, and it now is a behemoth which sucks up more money annually than the Pentagon, a program which grows twice as fast as the economy year after year and decade after decade. Simple math shows that this growth is unsustainable.

Entitlement, resentment and dependency are joined at the hub; each reinforces the other two. We "deserve" what is "ours," and we "earned" our dollar in benefits because we paid a dime in.

The pernicious effects of an entitlement mindset are so subtle and pervasive that it is difficult to tease out all the debilitating tendrils. There is no need to pick up litter on the sidewalk because that's somebody's job now. There is no need to become intimately involved in your children's education because that's the school's job. There is no need to nurture one's own health because it's the job of the doctors and nurses to make me well and fix all my chronic illnesses.

Entitlements have been marketed as the crowning benefit of security for the average citizen, and their innate contingency on historical accidents has been masked so as not to alarm a passive citizenry. As the quote from Douglas MacArthur below says, There is no security in life, there is only opportunity. The promise of everlasting security was a false one, and we will experience its collapse within the coming decade.

There are political and financial consequences to the debilitation of the citizenry who have been rendered passive "consumers" and resentful dependents. The dominance that was served by the entitlement mindset is vulnerable now that the entitlement system is careening toward insolvency, and so the Power Elites and Savior State--partners in that dominance--are busy masking the truth behind lies, misprepresentations, marketing, misinformation and propraganda.

Take one part opaque corporate welfare and one part craven Savior State endentured to corporate and Imperial Elites, then add in a citizenry in bondage to entitlement, resentment and dependency, and you have a culture and economy ill with the "sickness unto death."

Dr. David D. submitted this quote from Ivan Illich, and it speaks to the heart of the matter:

Yes, we suffer pain, we become ill, we die. But we also hope, laugh, celebrate; we know the joy of caring for one another; often we are healed and we recover by many means. We do not have to pursue the flattening out of human experience. I invite all to shift their gaze, their thoughts, from worrying about health care to cultivating the art of living. And, today, with equal importance, to the art of suffering, the art of dying.

Ivan Illich

I recommend these three profound books on health and medicine (once again):

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Monday, March 29, 2010

Credit bubbles must be reinflated to maintain owners' and lenders' solvency, but credit bubbles inflate prices to the point that there is no demand from qualified buyers and thus nothing to keep prices from falling further.

There is an unresolvable paradox at the heart of the government's desperate attempts to keep housing prices from falling any lower: the government must either reinflate housing values or at least maintain them at current levels, lest owners and lenders lose all their capital/collateral.

But keeping house prices artifically inflated to save owners and lenders who borrowed/lent during the bubble means that prices will remain unaffordable to qualified buyers (i.e. those who actually meet prudent lending standards, not government giveaway programs like the FHA 3% down payment, the $8,000 tax credit, etc.)

Without organic demand (demand from truly qualified buyers), then there is nothing to keep prices artifically high; over-supply and limited demand lead to lower prices.

To fully understand the paradox, we need to start with the fact that the U.S. economy depends on consumers borrowing ever-larger sums of money for its "growth." When borrowing ceases, the economy tanks.

As I documented in The Contrarian Trade of the Decade: the U.S. Dollar (March 22, 2010), U.S. consumers added $3 trillion of new debt in 2006 and a mere $46 billion in 2008. "Net increase in household liabilities" grew by $1.8 trillion in 2006 and $1.4 trillion in 2007, and then fell to $146 billion in 2008. Mortgage debt rose by $1.1 trillion in 2005, $1 trillion in 2006, $686 billion in 2007--and then fell by $106 billion in 2008.

In 2006 U.S. households borrowed $3 trillion in 2006 (fully 25% of the entire U.S. GDP), and the savings rate was either negative or near-zero, depending on who made the calculation. The economy was declared "healthy" and "growing."

In 2008, total household liabilities and mortgages grew by a meager $46 billion, household savings shot up to $470 billion and the economy was declared on life-support.

So here is the Federal Reserve and Federal government's terrible dilemma. In an economy totally dependent on exponentially rising credit and debt for its "growth" (in parentheses because the demand is not organic but credit-based), the government had to lower interest rates to zero (or negative rates, when inflation is considered) to goose faltering demand. (Zero interest rate policy: ZIRP.)

ZIRP greatly expanded credit by increasing the leverage of income. All borrowing is based on collateral: either disposable income and a credible promise to pay the debt incurred, or the collateral of cash/liquid (easily marketable) assets.

At high interest rates, $100 a month in disposable income might leverage $1,000 in new credit/debt. At very low rates of interest, that $100 supports $3,000 in new credit card purchases.

That's why American consumers have been trained to think only in terms of "the monthly nut." American households didn't really care if the mortgage was $200,000 or $400,000, as long as they could make "the monthly nut."

In the prosperous mid-1980s, mortgage rates were around 10%-12% (I know because I had one). So let's say a $1,000 monthly nut could support a $100,000 mortgage.

Drop interest rates to 5%-6%, and voila, the same "monthly nut" of $1,000 now supports a mortgage of $200,000. Though the Federal Reserve shills and lackeys deny that ZIRP had any causal relation to the housing bubble, it is clear that cutting interest rates in half will cause housing prices to double.

Credit was further expanded by lowering lending standards via Fannie Mae and Freddie Mac so heretofore marginal buyers could leverage modest down payments and incomes into home ownership.

The final two boosters which expanded credit to previously unknown levels were the subprime mortgage phenomenon of "no-doc" "liar loans" and zero-down mortgages, and Wall Street's packaging of these doomed subprime and Fannie/Freddie loans into mortgage-backed securities. Once the intrinsically corrupt ratings agencies blessed these defective fraudulent tranches as AAA (safe, low-risk investments), then Wall Street could sell virtually unlimited quantities of MBS, creating an unquenchable demand for more mortgages.

The consequence of this explosion of credit was predictable: housing values skyrocketed as millions of previously unqualified buyers leaped into homeownership on the back of unprecedented leverage (liar loans without prudent documentation of income, and low-/no-down payments).

The results of this imprudent expansion of credit were so predictable that the staid FDIC felt impelled to issue a warning in 2006 that 10% of recent home buyers were at risk of default.

Sadly, the FDIC was correct; there are about 50 million mortgages in the U.S., and about 5 million are in default (10%). But the dominoes have fallen further than the FDIC expected, and now fully one-third of mortgage-holders are "underwater," i.e. their mortgage exceeds the value of their home, and so foreclosures will certainly exceed 5 million.

Also predictably, the lenders of all these distressed/defaulted mortgages have been bankrupted by the staggering losses. To hide this fact, the Federal government regulatory agencies have allowed lenders to keep loans on the books at "mark to fantasy" valuations, and lenders are actively engaged in a host of other accounting tricks to mask the true extent of their losses--the main one being to evade the foreclosure process entirely so the loan will be left on the books as if it were "performing."

Now the Fed and the U.S. government are in a real bind: both the pool of borrowers and the pool of lenders has seen their collateral/capital wiped out to the tune of trillions of dollars.

Call it whatever you like: assets, collateral, cash or equity, trillions have been wiped off the balance sheets of households and lenders.

Oops--how can households with no collateral borrow money, and how can lenders with no capital extend credit?they can't, so the Fed has had to step in and essentially take over the mortgage market since no private buyers could be found who were stupid enough to buy FHA loans which which were defaulting shortly after the ink was dry on the mortgage docs.

Then there is the mortgage-reset "hammer of doom" which is about to drop on vulnerable homeowners and lenders:

There is one way to reignite demand from legitimate, qualified house buyers: let prices drop back to pre-bubble valuations circa 1997-8. And indeed, in many less-desirable or marginal areas, prices have fallen by 75% from their bubble-era levels. In the San Francisco Bay Area (supposedly immune to declines in value), there are multiple zip codes which have seen declines of 70+%, and many more which have experienced drops of 40% or more: Pinpointing home prices by ZIP code (S.F. Chronicle).

But drops of these magnitudes essentially bankrupt lenders and wipe out whatever equity the home buyers invested in the property. Those stupendous losses have yet to be fully tallied (due to the accounting tricks noted above) for either borrowers or lenders, but it is clear that as a nation the ability to borrow/lend $3 trillion a year by any prudent metrics of qualification is gone.

The collateral basis of that borrowing--home equity--has vanished for the majority of homeowners, and the ability of lenders to lend to marginal/fraudulent borrowers has been curtailed. Now the Fed's $1.4 trillion support of the mortgage market is scheduled to end, just as mortgage resets are set to surge.

The Fed and the U.S. government have fought tooth and nail to resist the declines in prices which are inevitable after a credit bubble has burst and supply far exceeds demand.

The government has done everything possible to keep bubble-era prices inflated: by essentially socializing the entire U.S. mortgage market, by offering an $8,000 tax giveaway to anyone buying a house, by enabling fraudulent accounting by lenders, and by launching one program after another aimed at keeping underwater borrowers in their homes, and maintaining the artifice that the loan is still performing and worth its nominal book value.

The paradox cannot be resolved. Prices cannot be allowed to settle to levels which will attract legitimate, qualified buyers (demand) because that will bankrupt millions of homeowners and multiple "too big to fail" mortgage lenders, wiping out trillions more in equity and capital, hobbling the borrowing and credit expansion on which the U.S. economy is now totally dependent.

There is another way, but it will never be taken: switch the incentives of the economy from borrowing and consumption to savings and production. But that would require a "reset" not just of finance but of society, government and culture.

In the meantime, look for a "Lost Decade" in which distressed debt is covered up via "extend and pretend" year after year, collateral, credit and borrowing continue to contract and various "fixes" which have failed miserably are expanded in a desperate attempt to "solve" the burst credit bubble by reinflating it.

It won't work, for the simple reason that borrowing is based on collateral; as incomes and equity/assets shrink, so does the ability to leverage/borrow--for both households and lenders.

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As a result of not fitting into the narrow confines of mainstream academic, economic and political boxes, Illich's critiques have faded into relative obscurity.

Illich saw that the political and economic institutions of industrial/post-industrial economies have become entirely counter-productive to health and liberty, and that a pervasive culture of what he termed disabling professions (what I call the upper-casteprofessionals who serve the status quo Power Elites) eroded and eventually expropriated personal autonomy--that is, control and responsibility for ones own health, education, livelihood(s), living arrangements, shelter, transportation and life.

This critique applies equally to "capitalism" and "socialism" alike; the socialist "expert" bureaucrat is just as delighted to rule one's life in every way as the advanced neoliberal capitalist functionary/apparatchik.

This inability to serve either ideological master has doomed Illich's work to low visibility in the cultural zeitgeist, and his powerful critique of disabling professions has naturally won him little praise in the inner sanctum of disabling professions: academia and its web of think tanks, etc.

The loss (or destruction) of patient autonomy and responsibility has been so complete that "healthcare reform" does not even recognise its absence. If financial collusion, fraud and embezzlement is the elephant in the room no one dares speak to directly, then personal responsibility is the blue whale in the tank than none dare "see."

As Dr. D. explained to me, the loss of individual autonomy is not just a loss of personal responsibility--it requires the destruction of community as well.

I do not claim to have reached the high summit of Illich's insights, but I immediately recognized how his insights were completely of a piece with the Survival+ edifice, which is built on skeptical identification of incentives and who benefits (cui bono) from transactions and political/ financial structures, and on an integrated understanding of things which have deliberately been mystified, reified, confused, distorted and derealizedby the disabling professions which serve the status quo's power structures.

Healthcare is one such power structure. As I noted in The High Water Mark of a Broken System: U.S. "Healthcare" (March 20, 2010), the U.S. spends twice as much as other developed (post-industrial, neoliberal capitalist) nations do as a percentage of GDP, yet our health lags those nations by any metric you choose.

That is the acme of a failed system, and the loss of autonomy/personal responsibility is at the very heart of that systemic, ontological failure.

Thus it is crazy-making in the extreme that "healthcare reform" completely ignores this loss of autonomy/personal responsibility (other than brief spurts of lip-service). Indeed, "reform" must ignore this, as recognition of the loss of this fundamental liberty would eventually bring the system down.

An analogy would be President Reagan's labeling of the Societ Union as an Evil Empire. Simply stating out loud what was obvious but politically verboten had a profound impact, both within the U.S. and in the Soviet Union itself (we came to learn after its collapse).

Thus to declare the American "healthcare system" as the perfection of counter-productivity and the enemy of personal autonomy, liberty, health and community, and the very cause of illness itself, is to undermine the entire failed contraption from its foundation to its teetering towers.

Another M.D. correspondent, Ishabaka, recently commented on the consequences of the destruction of personal responsibility in healthcare. I aked him via email what policy changes might encourage/rehabilitate individual responsbility in healthcare. Here are his comments in reply:

As to policy changes, that is something I have given a lot of thought to. I feel that Americans have completely given up on the concept of personal responsibility since World War Two. We now live in a country where anything bad that happens to you is someone else's responsibility, whether you are Lloyd Bancfein of Goldman Sachs and run your investment bank into the ground, or Joe Schmoe, who fails to notice the safety yellow speed bump in Wal-Mart's parking lot, trips over it, and sues Wal-Mart and goes on disability for neck and back pain. Winds up on Oxycontin too.

One of my "other" jobs is working at a chiropractor's office. I see some seriously injured patients there -- some who need major surgery as the result of automobile collisions in which the other driver was at fault, but I see a ton of people exaggerating their injuries from slip and falls (known as "sliplash" to chiropractors), and fender-benders, and want to be on addictive pain pills till Kingdom Come.

I had to apologize to a woman today because she was upset that on her last visit I suggested losing weight might help her low back to heal. She told me she was "big boned". Charles, she was somewhere between morbidly obese (more than twice ideal body weight) and super-obese (yes, that is a medical term, and means over three times ideal body weight).

I got home and just read an article on how one third of breast cancers are preventable - they are caused by obesity. I didn't know that. One in three American women will get breast cancer in their lifetime. The article said that medicine has done all it can in terms of breast exams and mammograms, and any further reduction in this horrible disease is the responsibility of the women of America. Good luck with that.

Ten years ago, our family visited a friend in San Antonio, Texas, and toured the city's historical museum. There, we saw a real Conestoga wagon. I was amazed. It was smaller than my mini-van. People loaded their families and all the belongings they could carry and headed west - a thousand miles or more - to seek freedom and fortune. They faced weather (Donner party), wild animals, hostile natives, and either busted sod, got their seed in, built a house and cut the wood to heat it through winter, and raised a crop - or they died.

They had no 911, Police, Army, doctors, lawyers; they had only themselves to rely on. That was a little over one hundred years ago.

If we could reinstate just 10% of that personal responsibility in Americans today, I think it would go a great way towards solving our problems. How to do so? I simply don't know. I think the Boy and Girl Scouts were on the right track (know any kids who are scouts today? I was one...). I also think some sort of mandatory rigorous national service at the end of teenage years - whether it be military, Peace Corps, or just cleaning up the billions of pounds of trash on our land and in our water might help.

If appointed healthcare Tsar, I would take all the dead-beats and gold-bricks off disability as one of the key features -half the cost we pay now. Thank Heavens we have just passed an over 1,900 page health care bill. My health care bill would have fit on nine pages with space to spare.

P.S. I just thought I'd add that I officially started my practice of medicine on July 4, 1981. I earned more money, and had a higher standard of living then than I have ever had since (income goes ever downwards for more unsatisfying work).

I was not bedeviled by malpractice lawsuits, and ordered about 10% the number of tests of all kinds that I order now. I prescribed only generic drugs unless there was nothing else that would do the job. I steadfastly refused to prescribe antibiotics for useless indications, such as the common cold, which is caused by a virus and IS NOT HELPED BY ANTIBIOTICS.

The hundreds of millions of prescriptions for antibiotics written for patients suffering from the common cold are the main reason we have a serious problem with antibiotic resistant bacteria in the U.S.A. today, including recently, some bacteria which cannot be killed by any available antibiotic, and are killing humans.

Thank you, Ishabaka, for these unvarnished views from the "front lines" of healthcare. Other M.D.'s and nurses have written me similar experiences, and like Ishabaka they too must hide their identity lest they suffer the consequences of telling the unwelcome and politically incorrect truth.

One way the U.S. healthcare system will devolve is the M.D.'s and R.N.'s will opt out. That is, just quit, or remove themselves to roles which limit their exposure to the toxic insanity which passes for healthcare now.

In my analysis, the political requirement to leave the truth unspoken lest it dismantle the status quo which benefits various Elites and cartels is called the politics of experience. Our politics of experience is so shriveled that we do not even recognize our own loss of autonomy and responsibility, which is the flipside of liberty.

We are so far gone that we unconsciously accept the radical notion that we can only be "healthy" if we are in the care of "experts" and taking various medications.

This extends into every nook and cranny of "healthcare," including diet, nutrition, and fitness.

Let me illustrate from personal experience. I don't discuss my own personal life here much, because I understand most acutely that it is banal, commonplace and entirely lacking in interest. When my own views flash through my careful journalistic analysis, I am routinely accused of being a Puritan or worse.

So I've been suffering from lower back pain for the past five months. The causes include stress, poor posture, too much time sitting in front of a computer, and laziness. Yes, life put on a full-court press (basketball analogy) the past six months, but my stress management was inadequate, my self-awareness was inadequate and my fitness was inadequate.

So responsibility for one's own health is not some disembodied, academic concept to me; I have been in a lot of pain, and have felt a pressing desire for liberation from pain.

Since I've been practicing wushu for a few years, and doing some very simple Tai Chi Chuan stretching for decades, it was natural that I would step up my stretching to deal with the pain.

About a month ago a good friend and I went hiking for a few days in the Sierra, and after watching me do my "upon rising" initial stretches, including a low leg stretch, he said, "I don't think I could do that." I was silent, but thought, "Of course you couldn't--I've been doing this for over two years, enduring the discomfort hundreds of times--and I'm still not very limber."

Then he murmured, "I should get a personal trainer when I get home."

You see the underpinnings of this mindset: we all need an "expert" to "help" us, to "instruct" us, to "heal" us, etc. etc. I had just showed him the basic stretches; who needs a personal trainer? To tell you that you have to do some things even if they hurt, even as you make sure you don't really hurt yourself?

This mindset is so pervasive that I don't think many Americans are even aware of it. Like cheap petroleum, it is assumed to be like air.

My brother and I have the "reckless" gene. We don't go out of our way to take chances; it's just that what we consider "safe" is apparently pretty far out on thin ice. Thus he's crashed motorcycles numerous times, just took a bad fall skiing in the Alps, etc. and I've fallen off roofs and ladders a number of times, wiped out on my bicycle, spilled motorcycles (when I had access to them) and various other injuries. So if anything, my back has taken all sorts of abuse and been subjected to carrying heavy loads of lumber and other materials for the past 37 years (less so now).

Bruce Lee once commented in an interview that the martial arts require unifying two apparently paradoxical attributes: instinct and self-control/self-discipline. We might say this applies not just to wushu (all martial arts, including "internal" disciplines) but to life itself.

It is our instinct to love fatty, salty, sweet foods, and to gorge on them when they are present. It is our instinct to avoid pain and discomfort and to "take it easy." But health requires a modicum of self-control, and the mastery of mind-body requires self-discipline and the understanding that discomfort is part of the process of fitness.

The body is constantly rebuilding itself, literally one cell at a time. It is designed and selected to heal itself, if given half a chance.

Sometimes it seems as if half of Americans are debilitated by having too little to do, even as the other half is debilitated by having too much to do--running The Red Queen's Race just to stay in place. Thus the entire nation is prone to disabling illness, both mental and physical--which are the same thing, as the mind and body are one, a dynamic union.

My first love's father was an M.D. (an internist with four daughters) and though he rarely "talked shop" he did tell me once that most of his patients just wanted someone to listen to them. This was a profound insight into health and the state of American culture as far back as the 1970s. People feel overwhelmed, unappreciated, lonely and without voice or outlet for their inner fears and frustrations. Fearing being labeled "mentally ill," they avoid seeking psychiatric or psychological counseling, and so they fall ill with "physical" symptoms which then enable them to see a doctor.

The community of other resources has largely been lost; people have been trained to be passive recipients of "expert" attention and to discount the mind-body unity that lies at the heart of yoga-ayurvedic and wushu.

This is not to say that surgery or medications aren't necessary at times; of course they are. If there's a tumor or malignancy, cut it out. But the structure of our "healthcare"/sickcare should make us wonder about our definition of "health" and our understanding of what generates health and what generates illness and ill-health.

Without an integrated understanding of food, diet, nutrition, mental health, fitness and the social/political/financial forces which benefit from illness and a deranged mindset, then we cannot even grasp the basics of "reform."

You have probably noticed that many people who are careful about their diet (so-called "health nuts") are cancer survivors. That is no accident; the prospect of death is an eye-opener, as is the experience of chronic pain.

Pain is an invitation to reach for a higher level of awareness, self-knowledge and self-discipline. I know this runs counter to literally everything implicit and explicit in American "healthcare," but it is nonetheless true on a level which is largely inaccessible to the status quo understanding of "health" and "healthcare."

By forcing me to incorporate chi kung and yoga into my basic wushu stretching, and by forcing me to stretch not three times a week but three times a day, my pain is pushing me to a new, higher understanding of stress management, self-awareness, self-knowledge, fitness and inner strength.

To think there is a magic pill or passive "take it easy" alternative is illusory.

It is peculiar how disembodied we are from the economic, political and cultural causal forces behind our ill-health and profound disunity/derangement.

It is painful to see how these forces have created an epidemic of obesity (i.e. "diabesity") which is debilitating much of the citizenry, and how these structures elicit self-loathing in the overweight even as they turn a once-normal state of modest fitness into "freakishly healthy" (our friends' teenager's description of my wife and I).

We have reached such a point of cultural degradation that the truly fit are almost as ashamed of their visible fitness as the obese are of their visible girth; to be fit is to be resented as some sort of overbearing moral nag, as if being fit (what was once "normal-sized") is some sort of threat to the status quo of managing diabesity for stupendous profits.

Yes, liberty, autonomy and personal responsibility are threats to the status quo, as are self-control, community, self-awareness, and knowledge of nutrition, diet, cooking and fitness. None of this is obscure; Anne Underwood and Dr. Walter C. Willett, chair of the department of nutrition at the Harvard School of Public Health, recently wrote a short essay in Newsweek which struck multiple "obvious" truths that almost no one ever speaks to: Crimes of the Heart It's time society stopped reinforcing the bad behavior that leads to heart disease— and pursued policies to prevent it.

Their suggestions included:

Subsidize whole grains, fruits, and vegetables in the food-stamp program. The underprivileged tend to have disastrously unhealthy diets, and no wonder: $1 will buy 100 calories of carrots—or 1,250 calories of cookies and chips. The government should offer incentives for buying produce.

Incorporate physical education into No Child Left Behind.

Require that sidewalks and bike lanes be part of every federally funded road project.

What we have now is a social/financial system constructed of inputs which essentially guarantee ill-health (garbage in, garbage out). To resist this requires what amounts to (in today's lax standards) supreme self-discipline and a rare integrated understanding of the perverse consequences of TV, gaming, unlimited doses of the Web, factory food, MSM and State propaganda, Big Ag/Big Food, Fast Food multinationals, sickcare, disabling professions and an exploitative status quo which profits from the management of chronic disease.

In this cultural and economic setting, the "reform" is no reform at all; it is a pathetic simulacrum of real reform, a deranged extension of the failed systems so firmly and profitably entrenched in the national psyche.

As always, we can start our own "reform" by taking back control of our own lives (autonomy) and taking back responsibility for our own health.

Here are two other important books on medicine, health and healthcare:

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Friday, March 26, 2010

"When belief in the system fades" the Great Middle Middle Class opts out: in this case, of the fraudulent, manipulated stock market.

Astute reader John M. recently offered this commentary on the news that Americans pulled money out of stock mutual funds in 2009, despite the glorious "nascent recovery rally" engineered by the Fed and Wall Street. That item can be found inThe Wisdom of Crowds: Americans Refusing To Buy Into the Rally (March 19, 2010).

According to this article, How Greed and Fear Kill Returns (NY Times), American investors put an estimated $506 billion into mutual funds in the past year, of which $409 billion went into bond funds. My guess is the balance went into overseas funds, currency/FX (foreign exchange) funds or commodity (oil, gold, etc.) funds.

The writer concluded, "The point is to recognize that, in aggregate, investors tend to be very bad at timing the market." Or in other words, avoiding stocks is simple the result of "dumb money/investors" doing the opposite of what they should have done to profit handsomely.

John M. offers a historical perspective on the issue:

I enjoyed your recent article about redemptions from equity mutual funds. I thought I'd provide a couple of historical examples where Americans redeemed more from funds than they put in, and significant bear markets followed shortly afterward.

At the top of the Dow's bull market in fall 1976 (the Dow had rallied 75% from the 1974 lows), Americans were pulling money out of equity mutual funds at a record rate. This was followed by a 27% drop in the Dow in 1977-78. Here's a news article about it from '76:

Actually, starting in 1972, there were more outflows than inflows in equity mutual funds throughout the 70s, and the Dow went nowhere between 1972 and 1982.

A counter-example would be 1988, when Americans pulled more out of equity funds than they put in due to jitters from the '87 crash, but the market continued to do well in 1989-99.

So it's not really a definitive indicator, but it's interesting that a similar pattern was developing in the early 70s with mutual fund inflows/outflows as the public slowly became disenchanted with stocks after the go-go 50s and 60s, and the market went sideways for 10 years from '72-'82.

Thank you, John, for a timely reminder about the last "Lost Decade." Maybe retail investors weren't so dumb after all.

In a way, a belief in the value, transparency, trust and reciprocity of the System is like a religious belief. The converts, the true believers, are the ones who work like crazy for the company, or the Force or the firm. And when the veil of illusion is tugged from their eyes, then the Believer does a reversal, and becomes a devout non-believer in the System. He or she drops out, moves to a lower position, or "retires" to some lower level of employment.

The belief that the stock market is trustworthy and transparent is also like a religious faith. Americans have lost that "religion"--and their faith in the trustworthiness of the entire fraudulent doomed carcass of American finance.

Hapless investors saw trillions of dollars of their hard-earned wealth destroyed in the dot-com meltdown, and they came to learn that insiders had distributed their shares during the run-up, leaving the investing public as bagholders when that bubble collapsed.

Their faith in the system was only shaken, however, and they dutifully piled back into stocks in the 2003-2007 time period, as the "smart money" bet on a collapse of the housing/credit bubble and on the fall of all the Wall Street firms which had profited from selling the fraudulent MBS and derivatives generated by the housing bubble.

Twice burned, trice shy. Now that American retail investors lost 40+% of their wealth in the 2008 stock meltdown ("global financial crisis"), they finally "get it:" Wall Street is a machine run on embezzlement, fraud, willful obscurity in service to information asymmetry, extreme leverage, predation, disinformation and malignant malinvestments in parastic speculations with no value except transactional churn.

Yes, investing in long-term bonds sure looks like a bad bet, as interest rates are sure to rise, despite the prognostications of Fed Chairman Ben Bernanke ("Away, tides! I speak for the mighty Federal Reserve!"). But "belief in the system has faded" and it won't return until the system is cleaned out of scum, fraud, obscurity and all the structural rot at the very heart of a predatory American financial system (and by extension, its political system as well).

This aligns with the public's reluctant grasp of the political and financial rot at the center of the U.S. Empire in the 1970s. Watergate was simply a bungled offshoot of an entire political and financial system built on disinformation, propaganda, manipulation, and criminal activities pursued in the name of "national security."

A new "improved" credit bubble took hold in 1982, and that expansionary-credit-based prosperity based on cheap oil lasted a good 25 years (1982-2007). But now the bubbles have all been blown and the bubble-blowing elixir (exponential expansion of credit) has lost its magic. To cover up the endgame, the Powers That Be are reduced to manipulation and propaganda. The public senses that the manipulations are not sustainable or credible, and so they once again reluctantly conclude that the predatory system does not serve their best interests.

Their belief that it once did was an illusion, but credit expansion masks a variety of bedevilments.

Here are two charts illustrating how the market responded in the 1970s as belief in the market/system faded and people pulled their assets out of stocks. Notice that even as the purchasing power of the the U.S. dollar sank, the market kept rallying madly, again and again and again, even as investors stampeded out of the arena.

So who was left to drive the market rallies in an empty arena? That's a good question to keep asking as investors once again leave the stock market arena.

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Thursday, March 25, 2010

Volume and advance/decline lines offer a window into stock market strength and weakness.

Astute reader Deon N. recently suggested that an update of the stock market's "forgotten indicators" would be timely. Deon referenced a prescient entry from last February: Forgotten Indicators: Is the Stock Market About to Turn Up? (February 5, 2009) in which frequent contributor Harun I. provided a snapshot of the sock market through the lens of what he termed forgotten indicators: total volume and the advance/decline line.

In response to Deon's request, Harun has kindly updated these "forgotten indicators." To smooth out noise, he has plotted long-term (52-week) moving averages on the charts.

I have excerpted the recent history of these multi-decade charts for a closer look; click on the image to open a new browser window with the full chart.

Here is the NYSE advance/decline chart, with a few notes from me:

And here is the NYSE total volume chart:

Harun provided this detailed commentary on the charts:

This goes along the lines of "just when I thought no one was paying attention". Bravo Zulu to your reader.

What we now have in the NYSE Advance/Decline Line, Cumulative Volume Index, and New Highs/New Lows Cumulative is, at this point, a reversal of first quarter 2009. The NH/NL and the CVI are continuing to advance but the A/D Line has stalled since Sept '09 and dipped below its 52-week SMA before regaining a toehold above the SMA. This has created a divergence in these indicators. This is a warning sign that says, "pay close attention." To 'me' a call to action is changes in the behavior of market participants that shows up in the price bars especially when they occur at virtual and physical support and resistance levels.

Harun now relates the A/D and volume charts to a price chart with Bollinger Bands. You can call up such a chart in any charting program/service and follow along.

Looking at the DJIA quarterly (not shown) we can see the head fake that occurred at this level of trend in 2007. Upper and lower Bollinger Bands, according to their creator, indicate overbought and oversold levels. In 2007 the first warning came when the third quarter took out the second quarter high but was unable to hold above that level and even collapsed below the second quarter open. This occurred at the upper BBand. Confirmation came in the first quarter '08 when price plummeted taking out the previous quarter low and penetrating the 2007 first quarter/annual low. Head fakes, like most failed formations, tend to extend and this move extended all the way to the quarterly lower band.

At the bottom of the move we saw bottoming tails on the 2008 4th quarter and 2009 first quarter price bars. With price both at the lower band and physical support 2002/2003 and a NYSE line that had not confirmed the lows, it was time to pay close attention. Second quarter '09 was an inside bar that was confirmed by the third quarter taking out the previous high and then the first quarter high.

Trend change could have been detected at lower levels of trend but starting at the monthly or quarterly level eliminates noise.

At present we have a stalled A/D Line and price approaching quarterly middle band resistance. How price behaves in this area will give vital clues as to opportunities that may arise. If the second quarter takes out the first quarter high and closes above the middle band then the probability increases that price will test the upper band. If there is weakness at the previous high or middle band that results in a failed rally there may be a downside opportunity. With NYSE Total Volume raising its own red flag it is time to pay close attention.

I encourage your readers as I have encouraged you to annotate the story of each price bar with their favorite indicator in multiple time frames. It greatly enhances one's ability to spot low risk opportunities.

Thank you, Harun, for this update.

My notes on the NYSE A/D line chart are self-explanatory. When price moved decisively below the advance/decline moving average in early 2008, that was an unmistakable warning sign of weakness to come--a full six months before the wealth destruction that occurred late in 2008.

Yet even as the market plummeted in 2009, the A/D line was diverging by hitting higher highs and higher lows. This presaged the major rally that topped out (in terms of the A/D line) in September 2009.

Now the A/D line is tracing out a divergence from this uptrend as it makes lower highs and lower lows. If the A/D line tends to signal a change of trend in price about six months ahead, then we are coming up on a price decline (9/09 + 6 months = 3/10).

The Wall Street truism is that "volume is the weapon of the Bull." If so, the Bull has been stumbling since mid-2006. Note how the blue moving-average line of volume fell sharply in early 2008, presaging the price collapse to come, and how it rebounded in early 2009 as the market rallied from the March 2009 lows.

Yet volume essentially collapsed in mid-2009, even as price continued its steady climb to recent highs. That divergence reveals fundamental distribution: players are selling madly as price moves up. The classic description of distribution is strong hands (insiders) are selling to weak hands (marks and shills who bought into the propaganda about the "strong recovery") who will be left as bagholders when price collapses.

As always please read the HUGE GIANT BIG FAT DISCLAIMER below to refresh your understanding that this is not investment advice, it is simply the freely offered ramblings of an amateur observer. By way of disclosure, I am short BAC and APC via puts, short the SPX via an inverse exchange-traded fund and heavily in cash. I could get creamed in these positions so please note once again that this is a disclosure, not advice, and it is offered so you can assess if what I'm writing here aligns at all with my own speculative positions.

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Wednesday, March 24, 2010

It's always tempting to blame scapegoats rather than look within for the sources of decline.

The operant phrase this coming decade will be the comic character Pogo's declaration that "We have met the enemy and he is us." What's nascent isn't the U.S. recovery (dead on arrival once the Federal government ceases borrowing and spending 10% - 15% of our GDP) but a multi-pronged trade war with China, the supposed source of all our problems.

Before we pursue that folly, perhaps we should ground ourselves in a few bits of reality first:

I reference a Foreign Affairs article, The Myth Behind China's Miracle, which states "Although China controls more of the world's exports than ever before, its high-return high-tech industries are dominated by foreign companies."

Bingo. The profit margins for Chinese manufacturers are razor-thin while the profits of companies having the goods made in China (such as Apple) are stupendous. Has anyone asked how companies like Apple maintain gross profit margins exceeding 50% while the companies making the iPod, etc. work with margins on the order of 1% to 3%?

China is extremely dependent on exports; there is no Plan B despite endless official pronouncements about building domestic demand. In U.S. Schizophrenia on China (December 23, 2008), a source stated, "Chinese per capita GDP was $1,231 for 2005, while the country's per capita foreign-trade volume was $1,000. Take away foreign trade, and Chinese per capita GDP would be $231, or 63 cents a day."

In A 1,000 Foot High Tsunami (October 21, 2008), I source data that shows 40% of China's GDP is direct foreign investment or government goosing of lending. The "China miracle" is trade-dependent and debt-dependent; to compensate for the recent slowdown in trade/exports, the Chinese government has spent the equivalent of three times the U.S. government's stimulus package and goosed lending to build projects of often-marginal value.

Is that a robust foundation for real growth,or a last-ditch effort to keep employment stable and asset bubbles from popping?

Companies — and their engineers — are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States.

The Chinese market is surging for electricity, cars and much more, and companies are concluding that their researchers need to be close to factories and consumers alike. Applied Materials set up its latest solar research labs here after estimating that China would be producing two-thirds of the world’s solar panels by the end of this year.

Not just drawn by China’s markets, Western companies are also attracted to China’s huge reservoirs of cheap, highly skilled engineers — and the subsidies offered by many Chinese cities and regions, particularly for green energy companies.

They write the whole thing, and many commentors talk about it, without ever noting the obvious. First, Silicon Valley housing prices meant salaries had to be ridiculous -- 5 times what a foreign engineer would make. Second, California has been regulating all the dirty industries out of the state. Third, other places are hungry for the business and will give tax incentives, breaks on real estate, etc., to get it.

People blame this all on China doing currency manipulation or somehow playing the game better. The fact is, we are kicking these people out and not even noticing that we're doing it. (emphasis added, CHS)

Michael added these comments in a second email:

But there may also be a change in the business climate to blame.

If Sarbox (Sarbanes-Oxley) rules mean no one thinks they can create a big company any more, then the goal is to do some little thing that gets popular and get bought up. Same thing if you think the patent system is too expensive to navigate. Only the companies with huge patent portfolios and deep pockets can play the "innovation" game any more. So again, just do some tiny project and get bought up.

Well said, Michael, thank you.

These are the unintended and deeply pernicious consequences of our government's near-zero interest rate policies since 2001, and of a deep cultural disdain for production rather than consumption. Every local government in the U.S. touts that it is "business friendly," but this is just beggar-thy-neighbor propaganda; the kind of business every local government wants is "clean" industry such as movie-making.

Thus Hollywood has been gutted as firms leave its high-cost, complacent atmosphere for environs which are begging for "clean" film-making.

Too bad movie-making is a tiny slice of the U.S. economy. Ditto social media, sports, music recording, and all the other "clean" work Americans covet and coo over.

The sad truth is that the government at all levels has regulated and burdened productive business to death while freeing the rapacious dogs of finance to pillage as they please. The parasitic lending and financial transaction sectors (the so-called FIRE economy of finance, insurance and real estate) were deregulated to the sort of freedom that only the rapacious can fully exploit, while "real businesses" which actually produced goods and productive services were strangled under layers of business fees, permits, mindlessly counterproductive regulatory structures, legal costs, taxes, healthcare costs, etc.

The unspoken cultural attitude which pervades the U.S. is a high and mighty complacency--we don't need to do any dirty work, we are free to play around with our iPods and other toys and make fortunes flipping electronic transactions through various government-induced asset/credit bubbles.

While everyone claims to love "entrepreneurs" and new business, try starting a business and weigh the burdens placed on you to do so. The cultural assumption is that anyone in business is "rich" and "raking in big profits," so it is only fair and just to heavily tax and regulate all businesses.

Alas, while a handful of global companies who maintain their workforce and production overseas are minting profits (Apple, IBM, et al.), it's because they keep a mostly token design/management workforce in the U.S. and keep the bulk of their productive assets overseas.

We as a nation have created deep, structural incentives to financial gaming and plundering, while crippling, impeding and burdening productive businesses."Healthcare" a.k.a. sickcare, is in effect a 17% tax on the productive economy. That's how much we spend on sickcare as a percentage of GDP, which is twice what other developed nations spend.

Add in a high (again, compared to global competitors) business tax rate, an unfavorable, high-cost legal system which rewards exploratory lawsuits and often-mindless regulation (no, I'm not talking about worker safety--that is common-sensical) and fees, and what you have is a entire ecology of disincentives to starting and operating a productive business in the U.S.

This is why I predict that many of the remaining small businesses in the U.S. willopt out in the years ahead as their faith/trust in the system has faded under the disincentives which are now structural in the U.S. economy and culture. As Michael observed, the cultural politics of experience is so blind to these realities that the MSM and the various State organs of propaganda literally don't recognize them or selectively eliminate them from public dialog. (Please see Survival+ for more on the politics of experience.)

Care to wager the odds of this strategy bearing productive fruit? Bitter ashes of structural decline seem much more likely.

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